The importance of full disclosure to HMRC
![](https://www.icas.com/__data/assets/image/0004/619402/varieties/wide-925px.png)
Given the extent of HMRC’s discovery assessment powers, we take a fresh look at the importance of ensuring transactions are sufficiently disclosed to HMRC.
As accountants and tax advisers submit tax returns to HMRC, clients will often want to know when there is certainty over the tax payable for a particular year. In many cases, this certainty is obtained once the time period has passed for HMRC to open an enquiry into the tax return, as specified in Section 9A TMA 1970 (individuals), Section 12AC TMA 1970 (partnerships) or Schedule 18 Finance Act 1998 (companies). Unless a tax return has been submitted to HMRC late, this time period will generally be based on the filing date of the tax return. Although, the anniversary of the filing deadline applies to companies that are in a group that is not 'small'.
Where tax returns are submitted late, the HMRC enquiry window will apply from the anniversary of the quarter date (31 January, 30 April, 31 July or 31 October) following the submission of the tax return.
But the timing of these deadlines is only part of the picture, and full certainty is dependant on whether circumstances have been fully and sufficiently disclosed to HMRC on the tax return. HMRC has powers to make a “discovery assessment” under Section 29 TMA 1970 (individuals), Section 30B TMA 1970 (partnerships) and Schedule 18, Part V, paragraphs 41 - 45 Finance Act 1998 (companies), and the period it can raise an assessment can be significant depending on the circumstances.
When can a discovery assessment be made by HMRC?
For HMRC to make a discovery assessment, it must be believed that either:
- Additional tax that is due arises from the careless or deliberate behaviour of the taxpayer or their agent (Section 29(4) TMA 1970 or Schedule 18, Part V, paragraph 43 Finance Act 1998), or;
- The officer couldn’t have reasonably been expected to have been aware of an under-assessment based on the information disclosed to them in the tax return.
Section 30B TMA 1970 has similar provisions for partnerships who haven’t disclosed sufficient taxable income on a partnership tax return.
To minimise the chance of a discovery assessment, accountants and tax advisers should make sure that sufficient information is made available to HMRC in a tax return. When submitting an individual or partnership tax return, there is the ability to disclose the treatment of contentious items as a white box note. Companies can make similar disclosures on their Corporation Tax computations.
If there is no disclosure of a contentious transaction or its tax treatment, it’s very difficult to contest a discovery assessment as HMRC could argue that it didn’t have sufficient information to open an enquiry under the normal timescales. It may also be the case that there has been careless or deliberate behaviour, which could give grounds for HMRC to raise a discovery assessment.
How far back can HMRC raise a discovery assessment?
For income tax and capital gains tax, the relevant time limit for a discovery assessment in Section 34 TMA 1970 is four years after the end of the tax year. This is extended by Section 36 TMA 1970 to six years if the taxpayer was “careless”, or twenty years for “deliberate” conduct (such as if a taxpayer hasn't notified HMRC of a liability). Similar provisions apply in Schedule 18 Finance Act 1998 for companies.
However, this extended time limit doesn’t apply where there is a “reasonable excuse”, which was relevant in the Erridge case on high income child benefit charge.
The more recent case of Kenneth Williams v The Commissioners for HMRC (TC09171) illustrates the impact of fully disclosing income or gains to HMRC. In this case, the taxpayer hadn’t disclosed income from rental properties and HMRC was able to raise discovery assessments going back to the 2004/05 and 2005/06 tax years.
Putting things right when mistakes arise
From time to time, information comes to light about an undeclared tax liability in previous tax years. Where it is still possible to amend the tax return for the year in question, then this can be done. Alternatively, a voluntary disclosure can be made to HMRC for previous years. This route is normally preferable, as HMRC should take into account the level of disclosure and co-operation when determining any penalties due from a discovery assessment.
The role of the accountant or tax adviser in terms of errors is outlined in Professional Conduct in Relation to Taxation (PCRT) and all ICAS members are expected to follow this guidance.
Let us know your views
We welcome your views, which help inform our work on consultations or other tax-related matters. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
Please email tax@icas.com to share your insights and feedback.